The importance of corporate strategy

by Les Nemethy			CEO of Euro-Phoenix

Companies are typically valued based on projected future cash flow or various multiples (e.g. of revenues, cash flow, etc.).  However, at some point in virtually every transaction, an investor will inevitably ask the seller for a written copy of the company’s strategy.  It is surprising how often the answer is that no such strategy document exists.  Does this matter?  I would argue most emphatically that, in most cases, the answer is “yes”. 

This article deals with three issues: (a) why is a written strategy important?  (b) what kind of issues should a strategy document address?  and (c) who should prepare the strategy document?

(a) Why is a written strategy important?

If you are thinking of carrying out an equity transaction, most investors will ask for a written strategy for the simple reason that a written strategy is an indication that there is not just an implicit framework in the owner or CEO’s head, but a coherent strategy that represents a consensus within the management team that has been communicated broadly.  Even worse, the lack of a written strategy may indicate that the firm has no strategy, or that it is “half-baked”.  If the company does not have a good strategy, there is a high probability that cash flows cannot be sustained or grown, and possibly also that the company is a “one man show” (for more on this, please refer to my earlier article on the “One Man Show” which can be found at www.europhoenix.com/node/480).  Putting a strategy in writing, and debating the subject among the management team, tends to sharpen minds.  A written strategy should be an evolving document, evolving as management thinking advances on the subject.

(b) What kind of issues should a strategy document address? 

Strategic thinking has evolved considerably over the years and, for an excellent book on the subject, I recommend The Lords of Strategy by Walter Kiechel.  There is not simply one monolithic method of formulating and carrying out a strategy.  However, in my opinion, investors will typically look for a strategy document that addresses the following issues:
· What is the vision and mission of the company?
· How does the company define its service/product/value proposition?
· How does the company define its market(s)?  (Geographically, in terms of customers, etc.)
· What makes the company unique?  Why would clients buy from the company  as opposed to a competitor?
· What are the barriers to entry for competitors?
· What are the strategic goals for the company (e.g. what position is it aiming to reach within its core market(s))?  Where would the company like to be in three to five years time?

Of course, once a company gives a strategy document to a potential investor, the investor will look for a business plan that is consistent with the strategy, and a management team that has the competencies and capabilities to implement the strategy.

(c) Who should prepare the strategy document?

From an investor’s perspective, it is best if management itself prepares the strategy document rather than farming it out to an advisory firm.  Or if outside advisors are used, managers should not be “hands off”, but use outside advisors as complementary to their own involvement.  Most investors find it important that management be capable of strategic thinking. 

In short, when preparing a company for a transaction, the objective is to show value in the company beyond its tangible assets.  The lack of a (good) written strategy will potentially increase the level of risk for an investor (increasing the discount rate in a Discounted Cash Flow valuation) and decrease the applicable multiples in a comparables valuation.  A written strategy, and then a credible plan for the execution of that strategy, form the cornerstone of a company’s value beyond the bricks and mortar.

Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (), a Central European corporate finance company focused on Mergers & Acquisitions.  He is the author of “Unlocking your Company’s Value”, available at